Avoiding Common Investing Mistakes

Are you guilty of any of these?

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Scott Holsopple

There are a lot of things you should do to take control of your retirement planning and make good saving and investing choices.

You should figure out what kind of retirement you want and how much it will cost. You should create a long-term strategy to reach your retirement goals. You should plan when you’re going to increase your savings contributions and how you’ll afford to do that. You should establish your risk tolerance and timeline to retirement, and then create an asset class allocation that fits you.

Most importantly, you should plan to keep planning each year so you’ll remain in control of your nest egg and your future.

Along the way, there are a few things you definitely should not do. Avoid these behaviors that tend to throw off well-intentioned investors who are otherwise taking the right steps:

Don’t refuse to sell a bad investment. Everyone gets attached. Maybe, when you first owned it, an investment made a lot of money. Maybe it’s your company stock. Maybe you just like the name of it.

On the flip side, you may hate an investment because it’s handed you big losses. But you stick with it, hoping to make your money back before you sell.

Regardless of the reason, no one will judge you for ditching an investment that’s no longer good for your portfolio. The bottom line is that your portfolio should represent all the most appropriate investments for you. Don’t worry about past gains and losses. Only consider the future.

Don’t hold too many investments. It’s easy to get caught up in a more-is-better mentality, but you really don’t need to hold lots of mutual funds in your 401(k) account just because you can. Choose the best funds from each asset class in your allocation, and stick with those. There isn’t an advantage to investing in 25 funds rather than five or 10. Over-investing just means more funds to track, and you could be diluting the quality of your portfolio.

Don’t neglect rebalancing. Remember, your asset class allocation should be based on your risk tolerance, investing timeline, and market conditions. Rebalance your account regularly to bring it back in line with your allocation. If you don’t rebalance, you’re reducing the benefits of diversification and you’re disregarding your own investing needs.

If you’re enjoying a hot streak in one asset class, it may be tempting to leave your account unbalanced and ride the streak. But remember, streaks end, and you’ve selected a diversified allocation because it helps alleviate risk.

Don’t forget your risk tolerance. When a bull market is heating up and everyone is seeing gains, it may be difficult to keep yourself in check. Riskier investments that are performing well can be tempting.

Frankly, I’d love to get all the benefits of the bull without the detriments of the bear. If there were a way to do that, we’d all be rich. The reality is that the market is unpredictable, and you can’t reap large rewards with taking risks.

So don’t get carried away with risky investments during an upswing. Remember how you’ve felt each time your portfolio has lost money. Stick to an investing plan that reflects your risk tolerance.

Don’t follow the herd. Investing can be scary, so it’s natural to want to stick with the herd. But history shows the herd isn’t particularly wise. In fact, the herd is reactionary. It doesn’t make the safest or best investing decisions.

Furthermore, your coworker or neighbor may not make the best investing choices. Your coworkers, neighbors, miscellaneous relatives, and other acquaintances are in no position to understand your finances or your investing goals.

Don’t make changes when you’re angry. If a mutual fund makes you mad, remember it doesn’t have emotions. It doesn’t care whether you switch to a different fund or change your allocation. Only you have emotions, so wait a few days to calm down before you make any big portfolio changes. Angry investing will only hurt you.

Scott Holsopple is the president and CEO of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.